Debt ETFs soon, may attract retail investors

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Published: December 2, 2019 12:41:16 AM

Currently, 99% of the quasi-sovereign CPSE bonds are privately placed with a limited pool of institutional investors, denying investment opportunities to retail buyers.

The Union Cabinet is expected to give approval for the modalities of the debt CPSE ETFs this week, according to official sources.

In what could help deepen the corporate bond market with enhanced participation of retail investors, the Centre will likely launch two debt exchange traded funds (ETFs) in this fiscal. The pioneering move will help the CPSEs mobilise a part of their annual borrowings in a cost-efficient manner.

The size of the debt ETFs — one with three-year bonds of eight CPSEs and the other with 10-year bonds of 10 CPSEs — will likely be in the range of Rs 10,000-15,000 crore. Unlike individual bonds floated by firms, these ETFs will be traded in the exchanges and will be a very liquid financial product for investors.

Currently, 99% of the quasi-sovereign CPSE bonds are privately placed with a limited pool of institutional investors, denying investment opportunities to retail buyers.

The Union Cabinet is expected to give approval for the modalities of the debt CPSE ETFs this week, according to official sources. To make these ETFs affordable and retail-investor-friendly, the minimum investment limit and the ETF unit size will likely be kept lower at Rs 1,000 against Rs 10 lakh in standalone CPSE bonds and Rs 5,000 in debt mutual funds.

Bond ETFs would also allow small investors to gain access to bonds of top-rated CPSE bonds in an inexpensive way. While debt mutual funds charge an expense ratio of 1-1.5% of net assets under management, the CPSE debt ETFs will charge a paltry 0.0005%.

The CPSE debt ETFs would be managed by Edelweiss Asset Management for a period of three years, which could be extended further.

In the proposed debt ETFs, no single issuer shall have more than 15% weight in the index. The companies, whose bonds are likely to be part of the debt ETFs include NHAI, REC, Nabard, IRFC, PFC, NTPC and NPCIL.

According to Sebi norms notified last week, no single issuer could have more than 15% weight in the index. The Reserve Bank of India notified last week that units of debt ETFs would be eligible securities for repo transactions.

According to official data, the CPSEs’ bonds constitute Rs 13 lakh crore or 42% of the total corporate bond market of Rs 31 lakh crore.

The debt ETFs would help the CPSEs, which together annually raise around Rs 1.5 lakh crore through bonds, to create a much wider investor base than they have through private placements.

Unlike debt mutual funds, the CPSE debt ETFs would address the investment risks of retail investors as the pooled funds would be invested in bonds of identified top state-run firms. In debt mutual funds, the retail investors might not know whether their monies were invested in bonds of troubled IL&FS or DHFL. The returns from CPSE debt ETFs are expected to be higher than the G-Secs, the official said.

The debt ETFs will have fresh tranches in the subsequent years with the funds subscribing to more of the same ISIN (international securities identification number) bonds issued earlier along with new bonds. The lesser the number of ISIN numbers, the more liquid are the securities.

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